As one of the most attractive guaranteed bond issues ever offered by NS&I comes to maturity, many savers will be looking for a new home for their cash.
In the next few months, it is estimated almost £8bn of one-year NS&I Guaranteed Growth and Guaranteed Income Bonds are set to mature.
Paying 6.2% – the highest ever rate paid on the product since launch in 2008 – it’s no wonder close to a quarter of a million UK savers signed up to the issue in the space of just over five weeks in August to October 2023.
It may be worth a timely reminder to clients that the bonds are taxable, unlike some other NS&I products
However, with UK interest rates having just been cut for the first time since March 2020, and now widely expected to see a period of decline as inflation eases, it could be a lot harder for savers and investors to replicate the level of risk-free return on cash that some products have recently offered.
Receiving a capital sum – whether from an inheritance, a salary bonus or a maturing bond – is a time when a client may be looking to their adviser for help, and it can act as a prompt to revisit their wider financial plan.
Cash products undoubtedly have an important role to play, often to meet shorter-term savings goals or as an emergency fund, when it can be appealing for clients to know their capital is secure and can be readily accessed should they need it.
Tax efficiency is an important consideration and it may be worth a timely reminder to clients that Guaranteed Growth Bonds and Guaranteed Income Bonds are taxable, unlike some other NS&I products. This means savers must be cautious about exceeding their personal savings allowance (PSA).
Clients with multiple investments might also encounter CGT for the first time
The PSA allows basic-rate taxpayers to earn up to £1,000 of savings interest annually without tax, while higher-rate taxpayers have a £500 allowance and additional-rate taxpayers have no allowance.
With the personal allowance frozen until 2028, more individuals may enter higher tax brackets or become basic-rate taxpayers for the first time. Additionally, those holding dividend-producing investments may face increased taxes as the dividend allowance was reduced to £500 this tax year.
Clients with multiple investments might also encounter capital gains tax (CGT) for the first time due to a significant reduction in the CGT allowance over recent tax years.
When looking at a client’s longer-term savings goals, while high interest rates have made it easier for savers to achieve a good return on cash products and billions have flowed out of riskier stockmarket-based investments, market analysis has repeatedly shown that risk assets, such as equities, have delivered above-inflation growth – partly because they’re investing in the companies whose goods and services are rising in price, while interest-earning deposits tend to track below the rate of inflation.
The right answer will be different for everyone, but it looks set to be a time where the value of advice will come to the fore
So, although savings deposits can pay attractive rates in the short term, it’s critical to help clients consider what the ‘real’ long-term return will be once inflation is taken into account and that by keeping some exposure to riskier assets, they are more likely to see their money grow in real terms.
Finding the right balance between risk and potential reward is the key to successful investing. Appetite for risk is a very personal thing, so for clients who may favour stability and security, making a leap from cash to direct stockmarket investing is likely to be ill-advised.
There are now many compelling investment-based solutions and planning options to enable clients to capture long-term performance potential, while also meeting their desire to protect capital to some degree, including:
- Products with an inherent guarantee. There will be a cost to any guarantee but it may be required in some cases to give the client the comfort they need to invest, rather than leave funds on deposit.
- Multi-asset funds, which invest across a wide range of different asset classes, can help reduce volatility when compared to single-asset class funds.
- Smoothed funds, which can help eradicate some of the volatility of stockmarket investing.
- Investing on a regular basis (e.g. monthly) to enjoy the benefits of pound cost averaging and therefore exposing all existing funds to potential volatility from day one.
- Splitting funds between guaranteed returns and real asset investing, for example, combining an annuity with a drawdown arrangement for the same client.
The right answer will be different for everyone, but it looks set to be a time where the value of advice will come to the fore.
Cat McInally is business development manager at M&G Wealth
With the current Govt. committed to creating housing by, (E.G.), freeing up planning… what about a commercial property fund looking to morph… Can Cat commend one? Even prisoners got early release… they seem to have done better than certain M&G investors…
I just got 12 month 6% growth with a kicker in £GBP..
if you know where to look… structured is still best!
I recently received the maturity value of my 6.2% guaranteed 1 year NS&I Bond and was mildly surprised to note it’s been paid gross (I checked three times). Presumably, self declaration to HMRC is left to the recipient, though I imagine that those who’ve never had to do a Self Assessment Tax Return or no longer have to simply won’t bother and HMRC will never know.